Buy-Sell Agreements: The Document That Decides What Your Business Is Worth When It Matters Most

Most business owners think of a buy-sell agreement the way they think of a fire extinguisher: something to have, not something to actually use. That framing is exactly backwards. A buy-sell agreement is not a contingency document. It is the document that sets the rules of value transfer at the moment your business is worth the most to someone else and you have the least leverage to negotiate.

The Agreement You Have May Already Be Working Against You

The two dominant structures are cross-purchase and entity-purchase (also called a stock-redemption). In a cross-purchase, co-owners buy each other out directly. In an entity-purchase, the business itself redeems the departing owner's interest. Each structure has different income tax consequences, different step-up-in-basis outcomes for the surviving owners, and different balance-sheet effects on the company.

Which is better depends on your entity type, the number of owners, and whether you fund the buyout with life insurance. And that last word, insurance, is where the planning conversation just got a lot more complicated.

Connelly Changed the Math on Entity-Owned Life Insurance

In June 2024, the Supreme Court decided Connelly v. United States, and the ruling matters for any business using a corporate entity-purchase structure funded with life insurance. The Court held that life insurance proceeds held by the corporation to redeem a deceased shareholder's stock must be included in the corporation's value for federal estate tax purposes, and that the redemption obligation does not offset that increase in value dollar-for-dollar.

The practical consequence: a deceased owner's estate could face a larger taxable estate than the family expected, because the insurance proceeds inflate the company's fair market value before the redemption occurs. Structures that looked clean on paper in 2020 may now create an unintended estate tax liability.

This is not a reason to avoid life-funded buyouts. It is a reason to revisit which structure funds the buyout and how the agreement is drafted, with counsel who knows the post-Connelly landscape.

The Other Problem: Stale Valuation Formulas

Even owners who have a buy-sell agreement often have one that was written when the business was a fraction of its current size. A fixed-price formula or a multiple negotiated at formation can leave a departing owner dramatically undercompensated or force the surviving owners to overpay at exactly the wrong moment.

Valuation provisions that hold up are ones that require a periodic third-party appraisal, specify which standard of value applies (fair market value, fair value, strategic value), and address what happens when the parties cannot agree. Inside the Sporos Doctrine, this work lives in the Soil layer: the structural decisions made before the liquidity event, not during it.

What to Do This Week

Pull out your existing buy-sell agreement and check three things: when it was last amended, how valuation is determined, and whether any insurance funding it is owned at the entity level. If you cannot answer all three with confidence, that is the finding.

A buy-sell agreement reviewed once and filed away is not a plan. Schedule a conversation with your business attorney and your financial advisor together, not separately. If the post-Connelly entity structure question is on the table, your advisor needs to understand the estate implications before your attorney redrafts the trigger language.

If you would like a second opinion on how your current structure interacts with the rest of your planning, I am happy to have that conversation.

The information provided is for educational purposes only and does not constitute investment, legal, or tax advice. Consult with qualified professionals for guidance specific to your situation.